That said, as we enter the new year, our view is that the slowly growing global economy is supportive of higher issuance volumes, even as regulation, accounting treatment, and other noncredit-related factors continue to constrain the use of securitized products.
As a percentage of outstanding loans, securitization rates in the U.S. remain well below their peaks, and have generally flattened out in recent years (at 15% to 20% for autos, cards, student loans, and commercial mortgage backed securities (CMBS)), despite the aforementioned strong increases in underlying loan volumes. We attribute this primarily to banks and other lenders keeping loans on balance sheet rather than securitizing, in part due to bond market pricing, regulatory factors, accounting treatment, capital charges, etc. The two outlying sectors in the graph are non-agency residential mortgage backed securities (RMBS), which, at a 10% rate, continues to struggle to find a consistent securitization format, and the collateralized loan obligation (CLO) sector, which has historically had a higher securitization rate than other asset types and now stands at roughly 50%. Overall, the chart paints a picture of structured finance underutilization, as institutions continue to keep much of their loan production on their own books.
We expect CMBS to see the largest increase globally, as loans securitized in the years leading up to the 2007 peak-issuance year will open up to prepayment and support new CMBS supply. Elevated property transaction volume may also support issuance, as we believe recent market volatility may make hard assets, such as commercial real estate (CRE), relatively more attractive to investors in 2016. Along these lines, 64% of respondents to a recent survey conducted by AFIRE (Association of Foreign Investors in Real Estate) plan to make modest or major increases to U.S. real estate investments this year, while 31% plan to maintain their holdings or reinvest sales proceeds into other U.S. assets, and none plan a major decrease. The U.S. ABS and RMBS sectors should see modest gains, based on the assumption of moderate macroeconomic growth and, in the case of ABS, recent growth in revolving and nonrevolving debt. The CLO sector is the most difficult for which to predict issuance, as recent CLO debt tranche spread widening around the globe, along with a small increase in LIBOR, has made CLO issuance less economic despite a drop in the price of leveraged loans. Additional uncertainty from risk retention--and lower overall loan volume--could cause domestic issuance to drop significantly, to around $50 billion; on the other hand, with a recovering market, it could reach $80 billion. Thus, for U.S. CLO volume, we use a $70 billion forecast.
We expect some issuance growth in Europe as the region's economies recover and clarity around regulation begins to emerge. The European market faces several challenges, but it is helpful to see a regulatory perspective that is looking for more sources of loan funding to drive economic growth. Meanwhile, the growth prospects for the major securitization markets within the Asia-Pacific region are mixed, with issuance across most asset classes being predominantly domestic. For the Latin American region, slowing demand for emerging market debt and a recession in Brazil may prove challenging, while stable performance is expected in Mexico and Argentina-based securitizations.
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